Pfizer Inc.

235 E. 42nd Street
New York, New York 10017
U.S.A.
(212) 573-2323

Public Company
Incorporated: April 21, 1900
Employees: 40,000
Sales: $4.476 billion
Market Value: $12.417 billion
Stock Index: New York London Basle Lausanne Paris
Brussels Zurich Geneva

Recently, Pfizer has reported $4 billion in sales, projected $500 million for research and development by 1988, and commanded one of the largest overseas operations in the industry. All of this, of course, did not happen overnight. After almost one hundred years of quietly manufacturing fine chemicals, the revolution in medical care through the development of penicillin led Pfizer to important innovation within the industry.

In 1849 Charles Pfizer, a chemist, and Charles Erhart, a confectioner, began a partnership in Brooklyn to manufacture bulk chemicals. While producing iodine preparation and boric and tartaric acids, Pfizer pioneered the production of critric acid. To this day, Pfizer sells citric acid to soft drink companies, using large-scale fermentation technology.

While Pfizer technicians became experts in fermentation technology, across the ocean Sir Alexander Fleming made his historic discovery of penicillin in 1928. Recognizing penicillin’s potential to revolutionize health care, scientists struggled for years to produce both a high quality and large quantity of the drug. Experimentation with production became an imperative during the Nazi air raids of London during World War II. In a desperate attempt to solicit help from the community of United States scientists, Dr. Howard Florey of Oxford University travelled to America to ask the U.S. government to mobilize its scientific resources.

Due to their expertise in fermentation, the government approached Pfizer. Soon afterward, Dr. Jasper Kane from the company laboratory began his own experiments. Initially using large glass flasks, Dr. Kane’s experimentation then led to deep-tank fermentation. Later, the company announced its entrance into large-scale production with the purchase of an old ice plant in Brooklyn. Refusing government money, the company paid the entire $3 million for the purchase and within four months John McKeen (future chairman and president) had converted the ancient plant into the largest facility for manufacturing penicillin in the world.

However, early production was not without its difficulties. The first yields of penicillin required constant supervision, and yet quality and quantity remained low and inconsistent. In one of those inexplicable quirks of history, however, a government researcher browsing in a fruit market in Peoria, Illinois discovered a variant of the “Penicillium” mold on an over-ripe cantaloupe. Using this variant, production suddenly increased from 10 units per millimeter to 2,000 units per millimeter. By 1942 Pfizer divided the first flask of penicillin into vials for the medical departments of the Army and Navy; this flask was valued at $150,000. It was Pfizer penicillin that arrived with the Allied Forces on the beaches of Normandy in 1944.

Even as the government controlled production of the drug for the sole use of the Armed Forces the public, aroused by miraculous results of penicillin, asked Pfizer to release the drug domestically. In 1943 John L. Smith, Pfizer president, and John McKeen, against the explicit regulations of the federal government, supplied penicillin to a doctor at the Brooklyn Jewish Hospital. Dr. Leo Lowe administered what was thought of as massive dosages of penicillin to a number of patients and cured, among others, a child suffering from an acute bacterial infection and a paralysed and comatose woman. Smith and McKeen, visiting the hospital on Saturdays and Sundays, were witness to penicillin’s curative effects on the patients.

Nevertheless, it was not until the end of the war when the federal government realized its mistake in restricting production of the drug. In 1946 Pfizer purchased Groton Victory Yard, a World War II shipyard, in order to renovate it for mass production of the new publicly accessible medicine. This marked Pfizer’s first official entrance into the manufacturing of Pharmaceuticals. In a few years the five story high building, equiped with 10,000 gallon tanks, produced enough penicillin to supply 85% of the national market and 50% of the world market. In 1946 sales had already reached $43 million.

Competition from 20 other companies manufacturing penicillin soon resulted in severe price reductions. The price for 100,000 units dropped from $20 to less than 2 cents. Furthermore, while the company could boast ownership of fermentation tanks “exceeded in size only by those in the beer industry,” Pfizer’s bulk chemical business decreased as former customers began establishing production facilities of their own. Pfizer’s instrumental role in developing antibiotics proved beneficial to society, but a poor business venture.

All this was to change drastically under the new direction of president John McKeen. In 1949 McKeen, whose career at Pfizer began the day after he graduated from the Brooklyn Polytechnic Institute in 1926, was elevated to president and later chairman of the company. Already responsible for increasing sales by an impressive 800% between 1939 and 1950, McKeen’s business acumen became even more evident during the Terramycin campaign. In the postwar years, pharmaceutical companies searched for new broad-spectrum antibiotics useful in the treatment of a wide number of bacterial infections. Penicillin and streptomycin, while helping to expand the frontier of medical knowledge, actually offered a cure for only a limited number of infections. Pfizer’s breakthrough came with the discovery of oxytetracycline, a broad range antibiotic that would soon prove effective against some 100 diseases.

The drug’s remarkable capture of a sizeable portion of the market was not due entirely to its inherent curative powers. Rather it took McKeen’s ability to promote the new drug that actually propelled Pfizer into the ranks of top industry competitors. McKeen’s first accomplishment was the timely decision to market the antibiotic under a Pfizer trademark. Thus Terramycin, the drug’s chosen name, launched Pfizer into its first ethical drug campaign. Lacking the resources other pharmaceutical companies had to promote their drugs, McKeen announced the “Pfizer blitz” whereby the company’s small sales force used an unusual array of marketing strategies.

For the first time, the company circumvented traditional drug distributing companies and began selling Terramycin directly to hospitals and retailers. Pfizer’s miniscule detail force (pharmaceutical salesmen) would target one small region at a time and promote their product to every accessible healthcare professional. The salesmen left generous samples of the drug at every sales call, sponsored golf tournaments, and ran noisy hospitality suites at conventions. Surprised at the success of this tiny band of salesmen which would eventually grow into a 4000 man army, industry competitors reluctantly increased their own sales forces and similarly began promoting their products directly to physicians.

Taking the calculated risks of insulting the entire medical community, Pfizer ran lavish advertisements in the conservative Journal of the American Medical Association. The ad was greeted with a large degree of reservation and threatened the drug industry’s abhorrence of “hard sell” marketing. In an unprecedented move, the company had paid a prohibitive $500,000 to run the multi-page ad. In two years the entire Terramycin campaign cost $7.5 million and Pfizer became the largest advertiser in the American Medical Association’s journal.

After twelve months on the market, Terramycin’s sales accounted for one-fourth of Pfizer’s total $60 million sales. Yet problems with the company’s advertising strategy were soon to surface. In 1957, while promoting the reputability of a new antibiotic called sigmamycin, a Pfizer advertisement used the professional cards of eight physicians to endorse the drug. John Lear, science editor of the Saturday Review, denounced this advertisement in a scathing attack. Not only were the names of the eight physicians fictitious, Lear claimed, but the code of Pharmaceutical Manufacturers Association prohibited soliciting endorsements from physicians. Moreover, Lear used the Pfizer ad to underscore and criticize what he saw as a trend towards the overprescription of antibiotics, exaggerated claims on drug effects, and concealment of possible side effects.

Pfizer was quick to defend their advertisement. The company upheld the reputability of the ad agency, William Douglas McAdams Inc., a highly respected firm responsible for the Sigmamycin campaign. While defending the drug and the clinical reports supporting the drug’s efficacy, Pfizer admitted that the business cards were purely symbolic and therefore fictitious and, as a result, may have been misleading. The company accordingly changed the campaign.

John Lear’s final attack on Pfizer expressed an unspoken industry complaint. Not only was it disturbing that such “hard sell” marketing should actually prove successful, but since Pfizer’s recent past was in bulk chemical production this added “insult to injury,” so to speak. Being a newcomer to the industry of ethical drugs, Lear argued that the young company should have shown respect for the industry’s formal and restrained method of conducting business. However, Pfizer was not intimidated by the industry’s attitude toward its advertising campaign; it was interested in claiming and maintaining a share of the market. If it meant breaking tradition, it was clear Pfizer was not going to hesitate.

Aside from its modern marketing campaigns, Pfizer was very successful at developing a diversified line of pharmaceuticals. While many companies concentrated their efforts on developing innovative drugs, Pfizer generously borrowed research from its competitors and released variants of these drugs. While all companies participated in this process of “molecular manipulation,” whereby a slight variance is produced in a given molecule to develop greater potency and decreased side effects in a drug, Pfizer was particularly adept at developing these drugs and aggressively seizing a share of the market. Thus, the company was able to reduce its dependence on sales of antibiotics by releasing a variety of other pharmaceuticals.

At the same time Pfizer’s domestic sales increased dramatically, the company was quietly improving its presence on the foreign market. Under the methodical directive of John J. Powers, head of international operations and future president and chief executive officer, Pfizer’s foreign market expanded into 100 countries and accounted for $175 million in sales by 1965. It would be years before any competitor came close to commanding a similar share of the foreign market. Pfizer’s 1965 worldwide sales figures of $220 million indicated that the company might possibly be the largest pharmaceutical manufacturer in the U.S. By 1980 Pfizer was one of two U.S. companies among the top 10 pharmaceutical companies in Europe, and the largest foreign health care and agricultural product manufacturer in Asia.

Pfizer’s crowning success to its unorthodox business proceedures involved McKeen’s quest for diversification through acquisition. While competing companies within the industry preferred to keep between $50 and $70 million in savings, Pfizer not only kept a meager $25 million in cash, but was the only major pharmaceutical to use common equity to borrow capital. “Not to have your cash working is a sort of economic sin,” McKeen candidly stated. Between 1961 and 1965 the company paid $130 million in stock or cash and acquired 14 companies, including manufacturers of vitamins, antibiotics for animals, chemicals, and Coty cosmetics.

McKeen defended this diversification strategy by claiming that prodigious growth had decreased overall profits while competitors, on the other hand, had neither grown nor profited from their conservative investments. Furthermore, Pfizer’s largest selling drug, Terramycin, generated only $15 to $20 million a year and therefore freed the company from a dependence on one product for all its profits.

In 1962 Pfizer allotted $17 million for research and that same year McKeen announced plans for his “five by five” program which included $500 million in sales by 1965. Obviously, sales would not come from new pharmaceuticals, but from the company’s accelerated rate of acquisitions.

McKeen never actually saw the company reach this goal during his presidency. In 1964 sales did surpass $480 million, but the following year Powers replaced McKeen as chief executive officer and president, and inherited a company with almost half its sales generated from foreign markets and wide product diversification from 38 subsidiaries.

For the next seven years Powers continued to preside over the company’s comfortable profits and sizeable growth. In the absence of McKeen’s style of conducting business, Powers directed Pfizer towards the more conservative and methodical approach of manufacturing and marketing pharmaceuticals.

Powers guided the company in a new direction with an increased emphasis on research and development. With increased funds allocated for research in the laboratories, Pfizer joined the ranks of other pharmaceutical companies searching for the innovative, and therefore profit making, drugs. Vibramycin, an antibiotic developed in the 1960’s, was very profitable; by 1981 it generated sales of $250 million.

In the early 1970’s Edmund Pratt Jr. stepped in as company chairman and Gerald Laubach took over as Pfizer president. While company assets reached $1.5 billion and sales generated $2 billion by 1977, Pfizer’s overall growth was much slower through the period of the late 1970’s and early 1980’s. Increased oil prices caused comparable increases in prices for raw materials; low incidents of respiratory infections slowed sales for antibiotics; and even a cool summer in Europe reduced demands for soft drinks and, consequently, the need for Pfizer citric acids. All of these factors contributed to the company’s slow rate of growth.

In the light of this, the two new top executives significantly changed company strategy. First, funds for research and development reached $190 million by 1981; this marked a 100% increase in funding from 1977. Secondly, Pfizer began a comprehensive licensing program with foreign pharmaceutical companies to pay royalties in exchange for marketing rights on newly developed drugs. This represented a noticeable change from the years Powers supervised international operations. Under his directive Pfizer choose to market its own drugs on the foreign market and establish joint ventures or partnerships only if no other option was available.

The two new drugs, one called Procardia, a treatment for angina licensed from Bayer AG in Germany for its exclusive sale in the U.S., and the other called Cefobid, an antibiotic licensed from a Japanese pharmaceutical, promised to be highly profitable items. Furthermore, drugs discovered from Pfizer’s own research resulted in large profits. Sales for Minipress, an antihypertensive, reached $80 million in three years, and Feldene, an anti-inflammatory, generated $314 million by 1982.

By 1983 sales reached $3.5 billion and Pfizer was spending one of the largest amounts of money in the industry on research ($197 million in 83). Pratt, in a final move to shed Pfizer of its former idiosyncracies, began selling some of its more unprofitable acquisitions.

It is interesting to note that one Pfizer product acquired through a company acquisition in the 1960’s experienced a market rediscovery during the 1980’s. Ben Gay, an ancient liniment marketed for relief of arthritis pains through the late 1970’s, found new patrons in the health-conscious 1980’s. Discovering that sales for Ben Gay were increasing when marketed as a fitness aid, Pfizer began an advertising campaign by employing athletic superstars to endorse the drug. This campaign cost the company $6.3 million in 1982.

With a projected budget of $500 million for research and development in 1988, a comprehensive line of new drugs, and a reduction of diversification through sales of unprofitable acquisitions, Pfizer is well prepared for the future.

Principal Subsidiaries

Radiologic Sciences, Inc.; Shiley Inc.; Valleylab, Inc.; Composite Metal Products, Inc.; Redmond Holding Co.; Pfizer Hospital Products Group, Inc.; Site Realty, Inc.; Pfizer Pigments Inc.; Pfizer Genetics Inc.; American Medical Systems, Inc.; Quigley Company, Inc.; Adforce Inc.; Myerson Tooth Corp. The company also lists subsidiaries in the following countries: France, Ireland, Italy, and Japan.